Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
The big news over night apart from whether Murdoch junior lied and whether the Republicans will compromise with Obama and the Democrats was the successful conclusion of a package to save the Eurozone and stabilise Greece. I actually think the best European news was the drama that was being played out on the heights of Galibier Serre-Chevalier in Southern France yesterday. I thought the theatre and backdrops were stupendous. But while that is getting some coverage the news is being dominated by the “done deal” – the “solution” to the Euro debt crisis. When I read the – Statement by the Heads of State or Government of the euro area and EU institutions – I considered it a statement of a group of failed states who have lost perspective on what governments should be doing.
Even the UK Guardian editorial (July 21, 2011) pronounced that the deal represented – Baby steps in the right direction.
The Guardian said:
… for the first time since the sovereign-debt crisis flared into life, the elite of eurozone policymakers have shown that they actually get it. Angela Merkel, Nicolas Sarkozy and all the others at last agree on the range of areas that any such pact must take in: that Greece cannot pay its bondholders back in full on time, and so must default; that it is no good banging on about debt repayments without mentioning economic growth; and that any currency area needs a common treasury.
I read the Statement by the Heads of State or Government of the euro area and EU institutions somewhat differently.
The 16-point statement suggests that the leaders still don’t fully get it at all.
The first 5 items covered Greece. Item 1 opened by welcoming:
… the measures undertaken by the Greek government to stabilize public finances and reform the economy as well as the new package of measures including privatisation recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to bring the Greek economy back on a sustainable growth path …
So the celebrated “solution” commits Greece to inflicting great damage on its economy – which would be totally unnecessary if they were not members of the EMU. The solution ensures that Greece will decline further and that major components of its public wealth will be sold off to the top-end-of-town.
There is also no certainty that Greece will be able to grow at all under these circumstances.
Readers often write to me expressing the view that the Greek government (and by association the Greek people) are to blame for this crisis – accessing cheap loans from Northern European banks, not paying enough taxes, not working hard enough – all the arguments that Germans, particularly like to put forward.
The question is even if the Greeks are lazy and don’t pay taxes why did this crisis come now? They didn’t just become “lazy” when they joined the EMU. Why didn’t the Greek government face insolvency prior to joining the EMU. The point is that it might be sensible if the Greek government could get the high income earners to pay more tax and it might be sensible to raise productivity – I pass no judgement on any of that – but none of these things are instrinsic to their crisis. The problem is the Euro and it is a shared problem across the Eurozone. Just wait to see what transpires in Italy – a large EU economy.
Item 2 outlines the 109 billion euro support package which also lowers “interest rates and extends maturities” which takes some pressure of Greece by keeping it independent of the private bond markets for a while.
The European Financial Stability Facility (EFSF) is being used as the “financing vehicle” which is a special purpose vehicle that was established by agreement with the 27 member states of the EU. This means that jointly with the IMF the funds will come from other national governments within the EU.
While the Guardian editor might construe this as a recognition of the Euro bosses “that any currency area needs a common treasury” it doesn’t represent that at all. The EFSF is more closely compared to the IMF rather than a national treasury that has the capacity to smooth asymmetric aggregate demand shocks with appropriate fiscal transfers.
The ECB has been playing a “sort of” fiscal role for several months by buying the troubled government’s bonds in the secondary markets and this separating the government deficits from the private bond markets. It would have been much more sensible if they continued to do that.
But the conditions under which they have been keeping the Euro afloat have been onerous for Greece, Ireland, and Portugal. Italy is now also imposing harsh fiscal measures to satisfy the Euro bosses.
The point is that a national treasury that seeks to advance public purpose would never impose pro-cyclical fiscal policy onto a “state” which pushed unemployment up into the stratosphere (for example, Greece over 15 per cent, Spain over 20 per cent). That is totally contrary to what a national treasury should be doing at a time when “its states” are experiencing harsh asymmetric demand failures.
If the EFSF was free to provide unconditional grants to member states to ensure growth was possible and not frame those grants in terms of strict fiscal targets then we might be able to construe it as a move to a monetary system treasury. As it stands its role and purview is far from that.
Item 4 covers the EU commitment to the abolition of democracy in struggling states:
… We welcome the Commission’s decision to create a Task Force which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training.
The northern states and their business mates must be rubbing their hands together at the thought of getting their hands on Greek public assets at rock-bottom prices. Privatisation makes selective private interests very wealthy. Lawyers, management consultants, etc reap huge bounties in “fees” and various wealthy private interests gain huge windfalls as governments seek to minimise the political damage of a “failed” sale by discounting the price of the assets.
But when this is going to be overseen by a “Task Force” it becomes even more unpalatable.
The UK Guardian editorial notes the whole deal is anti-democratic:
Most of all, eurozone leaders have failed once again to make a democratic case for what they are proposing. The pot for eurozone bailouts, the European Financial Stability Facility, is set to balloon, representing a sizable claim on European taxpayers. Yet it was cooked up between Mr Sarkozy and Mrs Merkel and rammed through in a few hours at a summit – with no mention of a vote or accountability to electorates. This is Europe’s democratic deficit writ large.
Item 10 says:
We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal’s resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes …
That is an anti-growth statement. These countries cannot grow under the current circumstances and are locking their unemployed into a long period of poverty.
Imposing an anti-growth strategy onto economies that are already badly short of aggregate demand (spending) is likely to worsen the crisis not improve it.
Item 11 says:
All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Public deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. In this context, we welcome the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in 2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and structural area. As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.
You cannot have “strict” fiscal targets and expect the government to be responsive to fluctuating private spending. You cannot have “strict” fiscal targets that violate the level of support that is currently required to engender sufficient growth.
The whole strategy is anti-growth – a high unemployment, low-wage and hence a very expensive solution to stabilised French and German banks. It would be a better solution to just wipe of the bad debts held throughout the European banking system and thus re-capitalise the zombie banks using the currency-issuing capacity of the ECB while at the same time forgetting about the Stability and Growth Pact that clearly doesn’t engender growth.
I don’t advocate bailing out private banks although I do advocate guaranteeing deposits. Failed banks should be nationalised and their executives dismissed and replaced by more realistically paid and publicly-focused professionals and their operations reoriented to public purpose. The ECB clearly has the financial capacity to do that but is poisonous (Bundesbank) culture prohibits it developing any progressive and pro-growth initiative.
Even the UK Guardian editorial recognises the short-comings of the “Statement”:
There is barely half a line about what governments will do about the zombie banks in Greece and elsewhere. And there is barely a whisper on reflation of European economies. One of the points says: “Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest.” This target is so unrealistically strict that even Britain’s No 1 hawk George Osborne hasn’t adopted it in his plans. Still, judged by the low expectations that must be brought by any observers of the euro crisis, this marks an advance.
I thought all the crowing by EU bosses overnight and the supportive of financial market commentators should be put in some context.
In that regard, there was an interesting article a few weeks ago in the German Magazine – De Spiegel (July 1, 2011) – Double Standards – Greek-Style Austerity Would Be Hell for Germans.
The article considers that “(s)ocial unrest would accompany austerity measures in Germany too”.
The writers says that ”
Tough times are ahead for the Greeks, with the government raising taxes, cutting social benefits and selling off state enterprises. Berlin has led the European pack in demanding the measures from Athens. But economists say Germany would be overwhelmed if it were forced to implement similar measures. The Germans are always way ahead when it comes to austerity measures — at least when it comes to having an opinion on what cuts other countries should make.
So while the news today is saying that the EU Statement overnight is a “done deal” and are representing it as a big success all I see is the unnecessary austerity that lies behind the deal.
The Spiegel article says that:
The result is a radical austerity package that will mean some €78 billion ($113 billion) in savings and additional revenue by 2015. Some €50 billion will come from privatizations and another €28 billion through tax increases and cuts to social benefits. This comes on top of savings of almost €12 billion last year, when more than 80,000 public workers were sacked and those that remained had their wages cut by 15 percent. Pensions also saw a 10 percent reduction.
They are also claim that Germans would not “cope with such penury” if it was imposed on them. If that scale of austerity was imposed they would “cause problems for the German government in terms of its ability to run the country.”
But they went further by providing some arithmetic to put the situation in better perspective. It is a way of overcoming the glazed eyes that most of us have when the untis get to billions and trillions.
Together with last year’s austerity measures, the Greeks hope to save €40 billion by 2015 using tax increases and spending cuts alone. That doesn’t sound very dramatic, but the figure alone reveals little. To gain a real sense of the Greeks’ savings efforts, one has to look at it in relation to gross domestic product — the country’s entire economic output. Then it becomes clear that within just five years, the Greeks want to cut spending by the equivalent of 17 percent of their total GDP in 2010.
Imagine if any of the advanced nations had to cut 17 per cent of their real GDP over the next five years starting from a position of 15 per cent unemployment.
The writers consider that cuts of that scale would “crush” the “German Economy”. They quote a German macroeconomist who says that “Removing that much money from the economy in such a short period of time would kill everything off”.
I urge you to read the article because they articulate in great detail what the scale of these cuts would mean to Germany. It is a sobering piece of journalism.
I also encourage you to translate the scale of cuts into the fiscal situation of your own countries to see how your nation would cope with such cuts.
If I was the EU bosses I would announce an end to the SGP and immediately instruct the ECB to purchase massive quantities of goods from Greek food manufacturers and ship the food to Northern Africa.
That would be better for everyone.
The Saturday Quiz will be back tomorrow sometime. It might be difficult.
Friday music segment – Never buy the sun?
While it seems most of the Wall Street criminals are going to avoid prison sentences I wonder who among the News Corp bosses will spend time in jail for what has been going on under their watch.
Anyway, it is Friday afternoon and some music is called for to take us into the weekend. I liked this song from another Billy:
You can see it on YouTube if you prefer.
That is enough for today!